The Road from U.S. Protectionism to Castro’s Cuba

Udo J. Keppler, Puck magazine, 1902 (Library of Congress)

By the Editors

As the debate over tariffs has reignited in American political life, the Coolidge Review is taking a look back at this country’s history with tariffs. Compare Mary Anastasia O’Grady’s views here with John Hendrickson’s assessment and Christopher Cox’s examination of American protectionism.  

This piece, based on an interview with the Wall Street Journal’s Mary Anastasia O’Grady, originally appeared in the Coolidge Quarterly in April 2018.

Protectionism is in the news again. The Trump administration openly seeks to protect domestic industries from foreign competition by levying new taxes on imports. The old practice of imposing tariffs, another word for such taxes, dates back to the founding of our nation.

In Coolidge’s time, tariffs were the official policy of the Republican Party. Coolidge came to the presidency after the passage of two tough tariffs, the Emergency Tariff Act of 1921 and the Fordney-McCumber Tariff of 1922, which became law under Coolidge’s predecessor, Warren Harding.

Tariffs, including those on goods from Latin American and Caribbean nations, were established wisdom, and Coolidge accepted, even welcomed, them.

Yet the U.S. tariffs of the 1920s on products and raw materials from our southern neighbors did damage that ranged far beyond that decade, says Mary Anastasia O’Grady, editorial board member of the Wall Street Journal.

O’Grady, who writes the weekly column “The Americas,” says: “The early consequences were economic. But there were other, later, consequences, including damage to the political culture. And that endured.”

The Sugar Lobby

The trouble started well before Coolidge. Coming out of the colonial period, Latin American nations needed to trade freely if they were to build cities and great institutions. But as in the United States, there was always a split between “free traders” and “fair traders.” So whenever U.S. producers moved to shut out competition from the South, the Latin nations were ready to retaliate with their own tariffs—or shut out America entirely.

Cuba, which Coolidge visited while in office, provides a good example. Cuba had one export industry: sugar. Yet U.S. sugar beet producers wanted households from coast to coast to buy domestically produced sugar, not sugar cane from Cuba. In the 1920s alone the beet sugar industry spent $500,000 to push for protection. Coolidge sympathized with another sugar lobby, that for maple syrup. His birth state, Vermont, was one of the nation’s leading producers of the syrup. Some of maple syrup’s competition came from the Canadian North (maple sugar), not the Latin South (cane or beet sugar). Lest Coolidge forget his loyalty, newspapers and syrup processors constantly warned him to accept no substitute. “President Coolidge’s favorite sweetening is maple syrup, none of your cane sugar, maple flavored combinations, but the real thing right out of the Vermont woods,” commented the Omaha World-Herald in 1924.

Other U.S. politicians, especially Republicans, also sided with U.S.-based companies. In the period from 1913 to 1930, the tariff on Cuban raw sugar increased from one cent per pound to two cents, according to economic scholars Richard Sicotte and Alan Dye. When, in 1924, the U.S. Tariff Commission recommended that the tariff on sugar be reduced by half a cent, the president did not act on the recommendation. Coolidge was protecting the U.S. sugar industry but also, of course, raising the price of sugar. The delay in accepting the Tariff Commission’s recommendation, said Democratic National Committee chairman Clem Shaver, was “costing the American consumers of this staple article of food an average of $145,000 a day.” Shaver concluded, accurately enough: “It is a great boon to the [domestic] sugar barons.”

The Damage Done by Smoot-Hawley

For a while, Cuba seemed to thrive nonetheless. Americans told themselves that Cuba could do well even with tariffs, in part because the tariff laid on Cuban sugar was lower than the tariff imposed on some other foreign producers.

But then came the Great Depression. By 1932, as O’Grady notes, the Cuban economy had shrunk by about 30 percent. Wages for Cuban sugar workers fell to less than half of what they had earned before.

To add insult to injury, the U.S. Congress passed, and President Herbert Hoover signed, the Smoot-Hawley Act, which raised hundreds of tariffs, including those on Canadian maple sugar and Cuban cane sugar.

“The important thing about Smoot-Hawley in Latin America,” says O’Grady, “was that it hit economies that were not diversified and therefore vulnerable.”

At that time, Latin America generally, like Cuba, produced mainly commodities. The U.S. economy was a big market for those commodities. Sales of commodities were how Latin countries got their hard currency, which enabled them to buy what they did not make.

“So when the U.S. imposed tariffs, we not only damaged key export markets but also deprived citizens of these countries of the money to buy what they needed,” O’Grady says. “Our tariff policy reduced Latin nations’ standard of living.”

By 1933, Cubans weren’t asking for a reduction in tariffs; they were begging. The president of the Cuban Chamber of Commerce in the United States, Carlos G. Garcia, sought to lure American politicians away from tariffs by reminding them what a healthy Cuba could buy from U.S. merchants struggling in the Depression era: “Approximately 10,000 hogs…15,000,000 pounds of bacon…10,000,000 pounds of milk and milk products…1 million barrels of wheat flour.”

President Franklin Roosevelt and his secretary of state, Cordell Hull, came from the Democratic Party, then pro-trade, and they moved U.S. policy toward freer trade, lowering tariffs on Cuba in 1934. But the United States also switched to a quota system whereby Congress could limit or increase the amount of sugar to be imported at will. Under that system, Cuba often lost.

The “Infant Industry” Narrative

Weary of both high tariffs and the arbitrary tinkering with the tools of American protectionism, Latin leaders started turning their nations inward. Cuba endured a revolution.

Mexico and other nations tried out a theory known as Import Substitution Industrialization, notes O’Grady. “The new goal was to protect ‘infant industries’ at home,” she says. (The concept of the infant industry comes from the German economist Friedrich List; in his own day, Alexander Hamilton spoke of “infant manufacture.”) “That is, nurture industrial production domestically and protect the producers from foreign competition until their companies and products were big and strong enough to face competition from abroad. Latin nations did not need to import.”

Even before the “infant industry” narrative took hold, the United States recognized its mistake. Suddenly, the roles had reversed, and the U.S. began begging for free trade. In 1938, when Mexico hiked its tariff rates, Secretary Hull told the press, “I am sorry and disappointed to see any country find itself in a position where it feels compelled to raise already high trade barriers with their ultimate hurtful effects, just at a time when most of the nations world are giving increasing attention and efforts to the lessening of trade barriers.”

Protectionism in Practice

But the “infant industry” philosophy was a flawed one. These infants lacked competition, notes O’Grady, “so, obviously, they never produced items as good as what was on the international market.” And, she notes, the infant industries quickly became government favorites, earning subsidies. Indeed, they often came to be state property.

In other words, the “infant industry” theory contributed to the industrial cronyism and corruption still plaguing so many Latin nations. Ironically, notes O’Grady, many of the economists who argued for government involvement in the economies were from the United States or had trained there. “They took the ideas that no one wanted here and imposed them there. Latin America was their sandbox.”

Cuba never truly recovered politically, and in 1959 it fell to Fidel Castro. Mexican-American relations eventually improved, and trade expanded, culminating in the North American Free Trade Agreement (NAFTA). But now, with President Trump’s plans for a U.S. tax on Mexican imports, Mexico is bracing for another downturn.

When Coolidge first entered national politics in 1920, he received some books arguing for free trade from his old college friend Dwight Morrow (later Coolidge’s ambassador to Mexico). Morrow hinted that Coolidge ought to rethink his support for GOP protectionism. But Coolidge, then still a governor, responded firmly: “My observation of protection is that it has been successful in practice, however unsound it may be in theory. That must mean that the theories have not taken into account all the facts.”

A century later, “all the facts” about protectionism have accumulated, and those facts are mostly negative. One wonders what Coolidge, surveying a century of squandered opportunity, would decide about protectionism today.

Mary Anastasia O’Grady writes the Wall Street Journal’s weekly column “The Americas,” on politics, economics, and business in Latin America and Canada.

This piece was originally published in the April 2018 issue of the Coolidge Quarterly.

For other historical perspectives on tariffs, see Christopher Cox’s essay and John Hendrickson’s “Grand Old Protectionists.”